How High Will DexCom Stock Go?

DexCom (NASDAQ:DXCM) is one of the two primary manufacturers of continuous glucose monitors (CGMs) for diabetes patients.

These devices, an increasingly popular alternative to traditional diabetes test strips, allow patients to avoid numerous finger pricks while also producing better blood glucose data that can aid in diabetes management.

DexCom has attracted significant investor attention, and the stock may very well still have potential as a long-term buy.

The Top Line Is Trending Strongly Higher

One of the most impressive aspects of DexCom’s performance has been its strong revenue growth. Since 2009, the company has not reported a single quarter of negative revenue growth. Even after all that time, DexCom’s year-over-year revenue growth rate remains very high at 27.0%.

There is a strong possibility that this positive momentum will continue because DexCom is seeing a boost from greater insurance coverage from both private insurers and Medicare for CGMs.

As the devices become available to more patients through their insurance providers, DexCom is likely to see persistent demand for its products from the millions of Americans looking for better ways to manage their diabetes.

In addition to enhanced demand for its existing products, DexCom is also continuing to innovate. For example, the company is planning to roll out a new device that is geared to the needs of Type 2 diabetes patients who aren’t currently on insulin. This market represents a good growth opportunity for DexCom, not least because there are an estimated 25 million such patients in the United States at the moment.

A final point in favor of DexCom’s growth is the fact that its devices could have a growing global appeal. About 10.5% of the total global adult population has some form of diabetes, creating a potential market of hundreds of millions of patients who could benefit from the CGMs made by DexCom.

Profits Are Positive and Still Climbing

In addition to the impressive revenue growth, DexCom has the advantage of already being profitable. In 2023, the company realized $542 million of net income, including $256 million in Q4 alone.

Those fourth quarter’s earnings represented a 178% increase over the year-ago quarter, demonstrating just how robust DexCom’s recent earnings growth has been.

It’s also worth noting that DexCom’s profit margins are trending gradually higher at the moment. The company initially became reliably profitable in 2019, and 2020 saw net margins in excess of 20%. Thereafter, net margins dropped back into single-digit territory throughout late 2021 and much of 2022. For the full year of 2023, net margin improved to 15.0%.

Between rising revenues and improving margins, there is likely a great deal of room left for earnings growth at DexCom.

Over the coming five years, analysts project that DexCom’s earnings per share will increase at a compounded rate of about 30%.

Indeed, 21 of the 24 analysts covering DXCM rate the stock as a Buy, implying significant bullishness. In addition, more than 93% for DexCom’s outstanding shares are owned by institutional investors.

Valuation Is Elevated

For all of its strengths, DexCom still trades at a high valuation that may well deter some investors.

The stock is priced at a lofty 14.4x sales and 77.6x forward earnings, both of which would require substantial further growth to justify.

While DXCM’s growth rate is appealing, these ratios may be high enough to declare the stock substantially overvalued.

The price-to-earnings-growth ratio of 2.4 provides some support for this conclusion. Ratios of 2.0 or higher are typically strong indicators of overvaluation for high-growth stocks.

The high price of DexCom is also somewhat reflected in analysts price forecasts for the upcoming year. Even though they rate DexCom overwhelmingly as a buy, the median target price of $146 per share would result in upside of less than 10%. This is far from a poor return, but it’s likely that the broader S&P 500 will equal or somewhat exceed DexCom’s performance over the next year.

Competitive and Financial Risks

In the CGM marketplace, DexCom’s only meaningful competition comes from rival device maker Abbott Laboratories.

DexCom is dominant among patients suffering from Type 1 diabetes, but Abbott holds the larger market share among those with Type 2. As a result, DexCom’s road to expand its business by selling more CGMs to Type 2 diabetes patients will require competing with a company that is already more established in that market.

Another potential issue for DexCom is its debt-to-equity ratio, which currently stands at 1.2x. In all likelihood, the company will be able to continue growing fast enough to manage its debts and avoid any serious problems from its current obligations.

In the event of a downturn in growth, however, this debt load in conjunction with the high pricing could cause investors to sour on DXCM.

How High Will DexCom Stock Go?

According to the consensus of 22 analysts, DexCom stock could rise to as high as $146.39 per share, implying 9.8% upside opportunity.

DexCom’s biggest deterrent by far is its high valuation. Under many circumstances, the multiples investors must pay for DXCM would make the stock virtually untenable, even after factoring in the high growth rates the company is forecast to achieve over the next few years. DexCom, however, may represent an exception due to its prime placement in a market with unique characteristics.

By 2030, the number of American citizens suffering from diabetes is expected to be roughly double what it was in 2015. CGMs represent an increasingly popular, convenient and useful tool for diabetes management, and DexCom is well-established as a manufacturer of these devices. Even accounting for competition from Abbott Laboratories, DexCom appears to have a growth runway that is all but ironclad.

Overall, DexCom looks like a good buy for investors who are looking for stocks to buy and hold for long periods of time. The stock’s current pricing may not leave too much room for near-term upside, but continued growth in CGM sales over many years could allow DexCom to become a very strong compounding stock. It’s also possible that DexCom could one day follow other successful medical device manufacturers by offering a dividend, in which case investors could see long-term income from their DXCM shares.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.